Impact of Crowdfunding on Investment Banking

February 25, 2019

Crowdfunding for investments or investment crowdfunding, as the name suggests is a method to source money for an institution, by collectively asking a large group of individuals, to invest in small amounts towards the larger goal of the company. And in return to this investment, these individuals will get equity shares of the said company.

Previously it was the entrepreneurs who would essentially source seed money, to begin a business, either by taking loans from the banks, angel investors, family or friends or venture capitalists, by offering them a return on investment. Investment crowdfunding, on the other hand, makes it possible for these start-ups, to ask for relatively smaller amounts, from a large number of people, when other options like those mentioned above are not available.

In the recent years, there has been a rise in platforms which offer investors, the opportunities of clubbing together and investing in properties or institutions, with the hope that they will earn good returns from their investments. Whenever there is a rise in the certain concept of investment, clearly an impact is noticed, which could have its own pros and cons.

In this blog, we have tried to put across ways in which crowdfunding will impact the investment banking scenarios.

Ease of Transactions

With the assistance of technology integration, it is noticed a sense of rapidity in the process of investment cycles has increased. Processes of investor confirmation are getting streamlined. Opportunities like direct internet investment are adding efficiency.

Increased Transparency

Both accredited and non-accredited investors will find it easy to get crowdfunding deals with clear information, which will eliminate chances of fraud. So if there is a website that has clear and transparent information on equity-based crowdfunding, then the less transparent investment bank will not gain that trust from individuals. Hence the traditional banks will need to keep up with transparent crowdfunding websites.

Professionalism and Efficiency

Start-ups looking for investment will understand the importance of clear communication of their hits and misses, as they will be more accountable to their shareholders. This will have a domino effect and create a discipline for company founders, which will further put the pressure on investment bankers to represent quality deals, thus creating a ripple effect of a win-win situation for all.

Thinner Margins

With the rise of technology, stock brokers were faced with decreased margins, similarly, technology impact on crowdfunding on investment banking will have a creative destruction. Currently, private banks charge a healthy fee for the work they put in,

in forms of underwriting of corporate debt and equity research. It is quite possible in the future for computers to take over a lot of tasks performed by human resources. Thus eliminating the need to charge heavily for services performed.

The debatable issue is, will crowdfunding and investment bankers coexist? It is likely possible but not without a few disruptions. There are many upsides but also noticeable downsides based on the kind of investors. Equity crowdfunding is still in a nascent stage, although it has the ability to impact the value chain and the role of the finance sector on a whole. It would be best if the finance sector works in regulating activities and create platforms that offer tools for tracking and transparency.